Accounting: Chapter 14

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Bondholders are creditors of the issuing corporation.

True or False

True

The face value of a term bond is payable at a single specific date in the future.

True or False

True

The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the at the end of each interest period.

True or False

True

To determine the six month interest payment amount on a bond, you would take one-half of the market rate times the face value of the bond.

True or False

False

The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium.

True or False

False

A corporation issues for cash $15,000,000 of 8%, 30-year bonds, interest payable annually, at a time when the market rate of interest is 9%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

a. The amount of annual interest expense decreases as the bonds approach maturity.

b. The carrying amount decreases from its amount at issuance date to $15,000,000 at maturity.

c. The amount of annual interest paid to bondholders increases over the 30-year life of the bonds.

d. The amount of annual interest paid to bondholders remains the same over the life of the bonds.

c. The amount of annual interest paid to bondholders increases over the 30-year life of the bonds.

A bond is simply a form of an interest bearing note.

True or False

True

On the first day of the fiscal year, Hawthorne Company obtained a $ 88,000, seven-year, 5% installment note from Sea Side Bank. The note requires annual payments of $15,208, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $4,400 and principal repayment of $10,808. The journal entry Hawthorne would record to make the first annual payment due on the note would include:

a. debit to Interest Expense for $4,400 b. a debit to Cash of $15,208

c. a credit to Notes Payable for $10,808

d. a debit to Notes Payable for $15,208

a. debit to Interest Expense for $4,400

The prices of bonds are quoted as a percentage of the bonds' market value.

True or False

False

The concept of present value is that an amount of cash to be received at some date in the future is the equivalent of the same amount of cash held at an earlier date.

True or False

False

Which of the following is not an advantage of issuing bonds instead of common stock?

a. Income to common shareholders may increase.

b. Tax savings result.

c. Stockholder control is not affected.

d. Earnings per share on common stock may be lower.

d. Earnings per share on common stock may be lower.

On January 1, 2010, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional Bank. The note requires annual payments consisting of principal and interest of $15,179, beginning on December 31, 2010. The December 31, 2010 carrying amount in the amortization table for this installment note will be equal to:

a. $40,201

b. $27,635

c. $48,620

d. $36,821

a. $40,201

(52,000-11,799)

15,179-3,380=11,799

52,000 x .o65= 3,380

The Marx Company issued $100,000 of 12% bonds on April 1, 2007 at face value. The bonds pay interest semiannually on January 1 and July 1. The bonds are dated January 1, 2007, and mature on January 1, 2011. The total interest expense related to these bonds for the year ended December 31, 2007 is:

a. $1,000

b. $3,000

c. 12,000

d. $9,000

d. $9,000

Gains and losses on the redemption of bonds are reported as other income or other expense on the income statement.

True or False

True

When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at:

a. their maturity value

b. their face valuec. a premium

d. a discount

d. a discount

On January 1, 2010, Gemstone Company obtained a $280,000, 10-year, 11% installment note from Guarantee Bank. The note requires annual payments of $47,544, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $30,800 and principal repayment of $16,744. The journal entry to record the issuance of the installment notes for cash on January 1, 2010 would include:

a. credit to Notes Payable of $280,000

b. a credit to Interest Payable of $195,440

c. a debit to Notes Payable of $475,440

d. a debit to Interest Expense of $30,800

a. credit to Notes Payable of $280,000

The journal entry a company records for the issuance of bonds when the contract rate is greater than the market rate would be:

a. debit Bonds Payable, credit Cash

b. debit Cash and Discount on Bonds Payable, credit Bonds Payable

c. debit Cash, credit Premium on Bonds Payable and Bonds Payable

d. debit Cash, credit Bonds Payable

c. debit Cash, credit Premium on Bonds Payable and Bonds Payable

On January 1, 2007, the Kings Corporation issued 10% bonds with a face value of $93,000. The bonds are sold for $91,140. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 2011. Kings records straight-line amortization of the bond discount. Determine the bond interest expense for the year ended December 31, 2007.

a. $9,300

b. $9,114

c. $9,672

d. $1,860

Either a or c

Balance sheet and income statement data indicate the following:

Bonds payable, 6%
(issued 1990, due 2015)
$1,056,498

Preferred 8% stock, $100 par
(no change during the year)
$200000

Common stock, $50 par
(no change during the year)
$1000000

Income before income tax for year
$328,215

Income tax for year
$98,465

Common dividends paid
$60000

Preferred dividends paid
$16000

Based on the data presented above, what is the number of times bond interest charges were earned (round to two decimal places)?

a. 5.18

b. 2.62

c. 3.62

d. 6.18

d. 6.18

Bonds are sold at face value when the contract rate is equal to the market rate of interest.